Sovereign Debt Auctions with Strategic Interactions

IMF Working Papers, July 25, 2025

Source details

Builds a model of sovereign borrowing and default, disciplined with proprietary bid level data.
Studies impact of alternative sovereign debt issuance formats on borrowing decisions, cost of debt, and welfare.
Focuses on the two most common auction types: uniform price auctions and discriminatory price auctions.
Calibrated to the Portuguese economy.

Model incorporates strategic interactions among bidders using proprietary bid level data.
Calibration target: Portuguese economy (no additional calibration details provided on the page).
Contrasts outcomes under uniform protocol versus discriminatory protocol across single-auction and repeated-auction settings.

Discriminatory auctions generate spreads that provide a better fit to the data.
Counterfactual results:
- Switching to a uniform protocol constitutes a Pareto improvement.
- The welfare difference is highest during crises: 0.6 percent of permanent consumption.
Dynamic effects are crucial:
- In a single auction setting, a risk averse government prefers the discriminatory protocol.
- With repeated auctions, discriminatory protocol properties incentivize over-borrowing.
- The anticipatory effect of discriminatory auctions on prices makes the uniform protocol a better option in dynamic/repeated settings.

Auction design affects sovereign borrowing incentives, cost of debt, and welfare—choice of protocol matters quantitatively.
Static (single-auction) preferences for discriminatory auctions by a risk averse government can reverse when accounting for repeated interaction and dynamic pricing effects.
Implementing a uniform auction protocol may yield Pareto improvements and better welfare outcomes during crises due to reduced anticipatory over-borrowing incentives under discriminatory protocols.